The Two Economies
The Two Economies: Austrian and Keynesian
There are several different ways that our economy can be handled. Two of them are Austrian economics and Keynesian economics. These are the most well-known schools of thought in economics. They have many differences between them.
To compare and contrast them and to find their advantages, we must first understand what Austrian and Keynesian economics even are.
In 1936, a man named John Maynard Keynes came up with Keynesianism, or Keynesian economics. His idea was that the state could stimulate the economy. This macroeconomic theory stated that the government could create new jobs for unemployed people. Whenever something was in high demand, Keynes called for the socialization of supply and demand. Keynesianism is strongly opposed to laissez faire, which is where the government is not allowed in the market. Keynesians also believe that government spending can help society.
The other economic school is called Austrian Economics, and it is an individualistic form of economics that is opposed to government intervention. This form of economics is called Austrian economics because the theory originates from Austria. Carl Menger’s book Principles of Economics is where Austrian theory first began.
They believe that the state of the economy should be a result of decisions individuals made. Instead of trying to create jobs or push certain businesses up, we should leave it natural. Any products, jobs, and businesses that are valuable to the people is what will be successful. The Austrian economist believes government makes existing economic problems worse, and that government even creates new problems for society. They also believe that the market will balance supply and demand on its own, and that intervention will topple that balance.
Keynesian economics calls for more government, whereas Austrian economics is more libertarian. For example, during a recession, a Keynesian would say that the government should spend a certain amount of money to solve a particular problem. The Austrian would say that the government will simply prolong the recession if it tries to change anything.
Austrians are more individualistic, and that individuals are responsible for their own economic situations. Keynesians see people as a group, and that as long as everyone gets a share, the economy will do just fine. So a lot of Keynesians also support some level of money redistribution. One way that redistribution happens is by taxing people who are richer more and taxing poorer people less.
Keynesianism is generally supported by Democrats, while Republicans are more likely to support Austrian economics or some other free market idea.
Both economic schools have their own advantages. They are very different ideas with very different results.
Austrian economics has its own benefits. For one thing, we have more control. The more the government makes laws and intervenes with our lives, the less freedom we will have. When the government spends to stimulate the economy, we have to pay more taxes to them. With less money, we would have less to invest in what we want. Under Austrian economics, this wouldn’t happen.
Also under Austrian economics, we would get lower prices. With less government spending and less money printing, the dollar would be more valuable, thus lowering prices of goods.
In the more Austrian environment, we would also get the best products, because the market would only be pure competition. Business owners risk their own money to provide products and services to the public. Since this is a risk, every business owner will try their absolute hardest to provide their best to the people. Without government intervention, the market place will be like natural selection. The businesses that are not valuable enough to the public will die, and the fittest businesses will survive and thrive. This would leave only the desirable products to us to buy.
With public institutions, there is no competition, and since the government gets a constant stream of taxes, it doesn’t have to worry about losing money. So whatever products or services we get from places like these, we won’t get the best of the best.
Under Austrian economics, the national debt will also decrease. Austrians will not call for more government spending because they don’t think that the government should intervene.
Keynesianism, like the Austrian system, has its own set of benefits.
In the Keynesian system, changes in the economy go much faster. For example, let’s say that there is a shortage in jobs. Instead of waiting for job opportunities to just come along, the state can create new jobs for the unemployed to take.
Also, in a Keynesian environment, we could predict economic changes because the economy would be more controlled. The state would know what times the nation will be in recession, and it can react appropriately.
Keynesianism also lowers nominal interest rates, which will increase the amount of products and services being produced. The lower interest rates will increase peoples’ chances of investing more money which will lead to more goods.
Just like how both these economics systems have benefits, they both have their downfalls as well. No system is perfect and flaws can be found in everything.
Austrian economics has some problems. One problem is that it is not very predictable, and it would be very hard to measure how well it even works. Since Austrians support keeping the market natural, the economy’s state will be quite random. We can’t predict what economic decisions random people make, so we’ll never really know when the economy will crash.
In Austrian economics, we can’t really stop a recession. An economy in its natural state is like an ocean tide, it will have its ups and downs. Change will also occur more slowly without intervention. For example, people who are unemployed will remain unemployed until a job opportunity shows up by itself.
Keynesianism also has many flaws. For one thing, we have to pay a lot more taxes. Generally, under Keynesianism, people who have more money will be taxed more than other people. This would lead a rich business owner to having less money for their business. This leads to many consequences, the business owner would be less willing to hire more employees, give current employees higher paychecks, update their machinery, and buy more materials for their products. This would also discourage future generations from becoming employers, leading to less jobs later on. After all, who would want to pay more taxes? Also, with a business owner buying less material, the person who sells them the material would make less money. If there are less of a certain product, this product would be scarcer, thus increasing its price.
Also, there are times where Keynesians encourage government spending. With more government spending, the country will accumulate more debt, and it will possibly lead to the printing of more money. This will decrease the value of the dollar, because then the dollar will be more common. This would also lead to more taxes for the people.
Now that these economic systems have been explained, and their pros and cons have been listed, I will explain my own views on the matter.
I support Austrian economics over Keynesian theory. One reason why is the benefits of Keynesianism are almost always temporary. For example, the government has several bridges built to help solve unemployment problems. The issue with this is the people who are hired to build the bridges will have to worry about what to do once the bridges have been complete. In Austrian economics, a person may have to wait longer to have a job, but once they do get a job, it will most likely be something more permanent.
Another reason why I am opposed to Keynesianism is because it is wasteful. Using the example with the bridges again, to even build a bridge, you need tons of material. Building bridges even if they weren’t even in demand is a huge waste of material. You can’t unbuild a bridge, once the materials have been used to make one, they will be a part of a bridge forever. Even if you were to demolish it, it would just be rubble, not the original material.
Also, if the people are busy working on the unneeded bridges, employers who decide they need more workers would be out of luck. The people who would have been hired are already gone. The people who resorted to work on the bridge would miss the opportunity to get a permanent job that they might have enjoyed more.
Keynesianism is based on the broken window fallacy. A French man named Frederic Bastiat came up with a parable about a boy who broke a window. The man who owns the window will now have to replace it. The people who saw the window brake came to the conclusion that the damage was actually a good thing. The reason why is because now the window repair man will have something to do and he will get paid.
However, the people are wrong. Now that the man has to replace his window, he can’t buy the suit that he wanted. Now he has to replace something that he had already. Not only was the man harmed by the broken window, the tailor who made the suit the man would’ve bought isn’t going to make more money.
Keynesians create new problems to supposedly help the economy. For example, they supply bridges to a city that had higher demand of something else. They simply pretend like the supply of bridges is low, just to give unemployed people something to do.
Keynesianism also creates more US debt. From the time of the Great Depression till now, Keynesianism has been more popular to support. Ever since then, US debt has increased dramatically. The US debt currently is 21.48 trillion dollars, according to the FY19 Federal Budget. Keynesians support government spending to ‘stimulate’ the economy, but it simply builds up debt.
Keynesianism also does harm to successful businesses. The richer businesses get taxed, and weaker businesses are often given loans. These weaker businesses were not accepted to get a loan from the bank because they would’ve been unable to pay them back. So, the government gives loans to these people loans they won’t pay back at the cost of the successful business. One reason why I support Austrian economics is because it is opposed to government intervention. Government has been shown to be inefficient. For one thing, federal agencies have no motive to give Americans their best. Something government run can perform as poorly as it wishes. They can’t go bankrupt and they don’t have to worry about going out of business. Federal workers are also hard to fire, so a lot of these agencies probably carry tons of awful employees.
Also, the government grew too large for spending to be supervised. It would be very hard to make sure that money isn’t being wasted. The US government pays money to more than 2000 benefit programs, and they are very easy to be taken advantage of. With something as large as the federal government, bureaucracy would be left and right. How can we possibly get anything efficient or top quality from this?
Austrian economics promotes an efficient free market where businesses compete to provide the best services at the lowest prices. Instead of supporting the forced demotion of more successful businesses to try and help the weaker ones, we should take the laissez faire approach.
These economic schools are simple to understand, and they are virtually opposites. Which would you trust more?